The Location Of Corporate Headquarters And The Governance Effect Of Institutional Investors

Accounting information is important for investors’ decisions and the earnings management is an imperative representation of accounting information. A large body of research documents that institutional investors are sophisticated investors in capital markets and they have a longer investment horizon. They are likely to have more direct access to the firm’s managers and hence they have higher monitoring incentives.There is an unbalanced regional development in China. The eastern region is more economically developed than the central and western regions. The geographical features and the external governance environment will affect the investors’ability of acquiring information and ability of monitoring, thereby affecting the behavior of the relevant decision makers. Will the difference in geographical features influence the institutional investors’governance function?Based on financial data of Shanghai and Shenzhen Exchange A-share listed companies from 2011 to 2014, the main findings of this study can be summarized as follows. First, the companies in east China have the lowest degree of accrual-based earnings management and the companies in west China have the highest degree of accrual-based earnings management in three regions, because the accrual-based earnings management is more likely to draw regulators’scrutiny than real decisions about pricing and production. However, Companies in east China have the highest degree of real activities manipulation and the companies in west China have the lowest degree of real activities manipulation in three regions, since the real activities manipulation is relatively more costly and bears less constraint from the external environment. Second, many characteristic can influence the institutional investors’ governance effect. Among the institutions, only the monitoring investors have motivation and ability to decrease the earnings management and improve the quality of accounting information. Third, higher ownership by institutions that are likely to monitor managers is associated with less earnings management. In east China, with higher marketization degree and the level of investors’protection, it is more convenient for the institutional investors to obtain information. What’s more, they can save the cost of monitoring because of the geographical position advantage. Therefore, the negative association between monitoring institutional ownership and the two strategies of earnings management is more pronounced among firms in east China.Based on the view of unbalanced development of our country, this paper not only reveals the relationship between the location of corporate headquarters and the two strategies of earnings management, but also reveals the relationship between the geographical features of the listed corporation and the institutional investors’ governance function. In particular, this research build on prior studies by providing direct evidence that monitoring institutions are an important class of investors that demands quality of accounting information as a governance device. Therefore these findings shed additional light on relevant research and providing a theoretical reference for the economic balanced regional development strategy in China.